FDI IN INDIA

WHAT IS FDI ?
Foreign direct investment (FDI) in its classic
form is defined as a company from one country
making a physical investment into building a
factory in another country.

Include investments made to acquire lasting

interest in enterprises operating outside of the
economy of the investor.
 Generally speaking FDI refers to capital inflows
from abroad that invest in the production capacity
of the economy and are

• Usually preferred over other forms of external

finance because they are

• Non-debt creating, non-volatile and their returns

depend on the performance of the projects
financed by the investors.

• FDI also facilitates international trade and transfer

of knowledge, skills and technology.
The FDI relationship consists of a parent
enterprise and a foreign affiliate which together
form a multinational corporation (MNC).

In order to qualify as FDI the investment must

afford the parent enterprise control over its foreign
affiliate.

The IMF defines control in this case as owning

10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for
an unincorporated firm.
 Foreign Direct Investment (FDI) is permitted as
under the following forms of investments-

• Through financial collaborations.

• Through joint ventures and technical

collaborations.

• Through capital markets via Euro issues.

• Through private placements or preferential

allotments.
ENTRY STRATEGIES FOR

FOREIGN INVESTOR
• Foreign Company has the following options to set up
business operations in India :

• By incorporating a company under the Companies Act,

1956
• A wholly owned subsidiary
• Joint venture company - existing company or new
company with domestic partner

• As an unincorporated entity
• Liaison Office
• Project Office
• Branch Office
 LIAISON OFFICE
• Liaison office not permitted to undertake any
commercial/trading/industrial activity

• The role of the liaison office is limited to

• Collecting information about possible market

opportunities and providing information about
the company and its products to prospective
Indian customers
• Acting as a communication channel between
the parent company and Indian Companies.

• It can promote export/import from/to India and

also facilitate technical/financial collaboration
between parent company/Group companies
and companies in India

• Approval for establishing a liaison office in

India is granted by RBI
PROJECT OFFICE
• General permission to foreign entities to
establish Project / Site Offices (temporary in
nature)

• Such offices cannot undertake or carry on any

activity other than the activity relating and
incidental to execution of the project

• General permission also for remitting surplus

funds after completion of project on production
of the following documents:
 BRANCH OFFICE
• Foreign companies engaged in manufacturing
and trading activities abroad are allowed to
set up Branch Offices in India for specified
purposes

• Branch Offices are established with the

approval of RBI

• Permitted to remit outside India profit of the

branch
 FOREIGN INVESTMENTS
THROUGH GDRs (Euro Issues)

Foreign Investment through GDRs is treated

as Foreign Direct Investment
CLEARANCE FROM FIPB
There is no restriction on the number of Euro-issue to be
floated by a company or a group of companies in the
financial year .

A company engaged in the manufacture of items covered

under Annex-III of the New Industrial Policy whose direct
foreign investment after a proposed Euro issue is likely to
exceed 51%

or

Which is implementing a project not contained in Annex-III,

would need to obtain prior FIPB clearance before seeking
final approval from Ministry of Finance.
 USE OF GDRs
The proceeds of the GDRs can be used for-

• Financing capital goods imports,

• Capital expenditure including domestic

purchase/installation of plant,

• Equipment and building and

• Investment in software development,

• Prepayment or scheduled repayment of earlier

external borrowings, and

• Equity investment in JV/WOSs in India.

 WHY FDI ?
1. Gain a foothold in a new geographic market.

2. Increase a firm’s global competitiveness and

positioning.

3. Fill gaps in a company’s product lines in a

global industry.

4. Reduce costs in areas such as R&D,

production, and distribution.
FACTORS REQUIRED TO
ATTRACT FDI
• Low cost BUT Qualified, Educated/Skilled Labor
Pool.

• Long-term Market Potential OR Yields greater than

can be achieved Domestically.

• Access to Natural Resources.

• Geography

• Stability of the economic and Political

Environment.
FORBIDDEN TERRITORIES
FDI is not permitted in the following industrial
sectors:

• Arms and ammunition.

• Atomic Energy.

• Railway Transport.

• Coal and lignite.

• Mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamonds, copper, zinc.

• Lottery Business

• Agricultural or plantation activities

• Housing and Real Estate Business (except

development of townships, construction of
residen­tial/commercial premises, roads or
bridges to the extent specified in Notification
No. FEMA 136/2005-RB dated July 19, 2005).
F D I - APPROVAL
Foreign direct investments in India are
approved through three routes:

• Automatic approval by RBI.

• The FIPB Route.

• CCFI Route
AUTOMATIC ROUTE
• No need of Prior Approval From FIPB,RBI,GOI.

BUT

The investors are only required to notify the

Regional Office concerned of  the Reserve Bank
of India within 30 days of receipt of inward
remittances.
AND

File the required documents along with form FC-

GPR with that Office within 30 days of issue of
shares to the non-resident investors.
AUTOMATIC ROUTE
The Reserve Bank of India accords automatic
approval within a period of two weeks (provided
certain parameters are met) to all proposals
involving:

• foreign equity up to 50% in 3 categories relating

to mining activities .

• foreign equity up to 51% in 48 specified

industries.

• foreign equity up to 74% in 9 categories .

 THE FIPB ROUTE

• FDI in activities not covered under the

automatic route require prior government
approval.

• Approvals of all such proposals including

composite proposals involving foreign
investment/foreign technical collaboration is
granted on the recommendations of FIPB.
• Application for all FDI cases, except NRI
investments and 100% EOUs, should be
submitted to the FIPB Unit,DEA, Ministry of
Finance.

• Application for NRI and 100% EOU cases should

be presented to SIA in Department of Industrial
Policy and Promotion (DIPP).

• Application can be made in Form FC-IL. Plain

paper applications carrying all relevant details
are also accepted.

• No fee is payable.
 CCFI ROUTE
• Investment proposals falling outside the
automatic route.
And
• Having a project cost of Rs. 6,000 million or
more would require prior approval of Cabinet
Committee of Foreign Investment (“CCFI”).

• Decision of CCFI usually conveyed in 8-10

weeks. Thereafter, filings have to be made by
the Indian company with the RBI.
 MAJOR BODIES
CONSTITUTED FOR FDI
1991- Foreign Investment Promotion Board FIPB

1996- Foreign Investment Promotion Council

FIPC

1999- Foreign Investment Implementation

Authority FIIA

2004- Investment Commission

Secretariat for Industrial Assistance (SIA)

ADVANTAGES OF FDI
• Increase in Domestic Employment/Drop in
unemployment

• Investment in Needed Infrastructure.

• Positive Influence on the Balance of Payments.

• New Technology and “Know How” Transfer.

• Increased Capital Investment.

• Targeted Regional and Sectoral Development.

DISADVANTAGES OF FDI
• Industrial Sector Dominance in the Domestic
Market.

• Technological Dependence on Foreign

Technology Sources.

• Disturbance of Domestic Economic Plans in

Favor of FDI-Directed Activities.

• “Cultural Change” Created by “Ethnocentric

Staffing” The Infusion of Foreign Culture , and
Foreign Business Practices
 FDI

SECTORAL GUIDELINES
 AIRPORTS
Foreign Investment up to 100% is allowed in
green field projects under automatic route

Foreign Direct Investment is allowed in

existing projects

- up to 74% under automatic route

- beyond 74% and up to 100% subject to

Government approval
 TELECOM
• FDI in basic and cellular, unified access
services, national/ international long distance ,
V-Sat, public mobile radio trunk services ,
global mobile personal communications
services

- Automatic up to 49%
- FIPB beyond 49% but up to 74%

Manufacture of telecom equipments -

Automatic up to 100%.
DOMESTIC AIRLINES
• FDI up to 49% (40%) permitted under
automatic route

• Automatic Route is not available

• However, a foreign airlines are not allowed to

have any direct or indirect equity participation

• 100% investment by NRIs/OCB’s

DRUGS & PHARMA
• FDI up to 100% is permitted under the automatic
route for manufacture of drugs and
pharmaceuticals (The following is the current
position)

• FDI up to 74% in the case of bulk drugs, their

intermediates Pharmaceuticals and formulations
would be covered under automatic route.

• FDI above 74% for manufacture of bulk drugs will

be considered by the Government on case to case
basis
 INSURANCE
• FDI up to 26% allowed on the automatic route

• However, license from the Insurance

Regulatory & Development Authority (IRDA)
has to be obtained

• There is a proposal to increase this limit to

49%
 MINING

• Coal & Lignite mining for captive consumption

by power projects, and for iron & steel and
cement production - Automatic up to 100%

• Mining covering exploration and mining of

diamonds and precious stones, gold, silver
and minerals - Automatic up to 100%
 PETROLEUM
• Petroleum and natural gas sector, other than
refining and including market study and
formulation; setting up infrastructure for
marketing - Automatic up to 100%

• For petroleum refining activity 100% FDI is

permitted in Indian Private Companies under
automatic route and up to 26% FDI is
permitted in Public Sector Undertakings with
Government approval
PRIVATE SECTOR BANKING

Foreign Investment up to 74% is permitted from

all sources under the automatic route subject to
guidelines for setting up of branches/subsidiaries
of foreign banks issued by RBI from time to time.
 TRADING
• Wholesale / cash & carry trading - Automatic
upto 100%

• Trading for exports - Automatic upto 100%

• Trading of items sourced from small scale

sector - 100% with Government approval

• Single Brand product retailing - 51% with

Government approval
 PRINT MEDIA
• FDI upto 100% in publishing/printing scientific
& technical magazines, periodicals & journals

• FDI upto 26% in publishing news papers and

periodicals dealing in news and current affairs.

• All investments are subject to the guidelines

issued by the Ministry of Information and
Broadcasting
 BROADCASTING
• FDI permitted for setting up hardware facilities
such as up-linking, HUB, etc up to 49% under
Government approval route

• FDI permitted in Cable Network up to 49%

under Government approval route

• Foreign Investment (FDI/FII) up to 49% allowed

under Government approval route in Direct to
Home Service Providers. FDI limited to 20%

• FDI permitted in FM radio up to 20% under

Government approval route
 INFRASTRUCTURE
• 100% FDI is permitted for the following activities:

• Electricity Generation (except Atomic energy)

• Electricity Transmission
• Electricity Distribution
• Mass Rapid Transport System
• Roads & Highways
• Toll Roads
• Vehicular Bridges
• Ports & Harbors
• Hotel & Tourism
SPECIAL INVESTMENT
AVENUES
ELECTRONIC HARDWARE AND
SOFTWARE TECHNOLOGY
PARKS
• 100 percent foreign investment under
automatic route is allowed in electronics and
software industries set up exclusively for
exports.

• Eligible to purchase, free of customs duty/

excise duty, their entire requirement of capital
goods, raw materials and components, spares
and consumables, office equipments etc.
EXPORT ORIENTED UNITS

• 100% foreign equity (is permitted through

Automatic Route similar to SEZ units) in Export
Oriented Units (“EOUs”) even if it is
manufacturing an item reserved for the small
scale sector

• EOUs enjoy several privileges like duty

exemption on import and domestic procurement
and also Income tax exemption till 31.03. 2009
• Project with minimum investment of Rs.10 million and
above in building, plant and machinery qualify to be
considered under EOU scheme

Not applicable in case of certain industries like

agriculture, floriculture, information technology, services,
hand made jewellery, etc.

• Exemption of Industrial Licensing for manufacture of

items reserved for SSI sectors.

• .
SPECIAL ECONOMIC ZONE
• Special Economic Zone (“SEZ”) is deemed to
be foreign territory for the purposes of trade
operations and duties and tariffs

• No cap on Foreign investment for

manufacturing items reserved for SSI as well
as exemption from industrial licensing

• An SEZ unit can be set up to undertake trading

activities in addition to manufacturing of goods
and rendering of services
 ILLUSTRATIVE LIST OF
SECTORS UNDER
AUTOMATIC ROUTE FOR
FDI UP TP 100%
• Most manufacturing activities
• Drugs and pharmaceuticals
• Food processing
• Electronic hardware
• Software development
• Film industry
• Advertising
• Hospitals
• Pollution control and management
• Management consultancy
• Computer related Services
• Research and Development Services
• Construction and related Engineering Services
• Pollution Control and Management Services
• Health related & Social Services
• Travel related services
ADVANTAGES OF INDIA
• Stable democratic environment over 60 years of
independence

• Large and growing market

• World class scientific, technical and managerial

manpower

• Cost-effective and highly skilled labor

• Abundance of natural resources

• Well-established legal system with independent
judiciary.

• Developed banking system and vibrant capital

market .

• India among the top three investment hot spots and

one of the fastest growing economies in the world.

• Large English speaking population

FDI EQUITY INFLOW
 FDI INFLOWS

FINANCIAL YEAR-WISE DATA

FOREIGN TECHNOLOGY
TRANSFER
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